Watching Your Legal System at Work


Expecting Inspection

We are unwilling to send police and judges into a new thicket of law, to seek a creature of uncertain description that is neither a plain-view inspection nor yet a "full-blown search."

- Antonin Scalia

Suggestions of misconduct and mismanagement in the operation of a unit trust, Flat Rock Forests Trust, led the High Court to order appointment of inspectors to inquire into the Trust's operations.  Investors complain losses of investment assets totalling $14 million cannot be explained solely by falling log prices.  They suspect those running Flat Rock overvalued assets sold to the Trust and that Flat Rock managers had a direct or indirect personal interest in the transactions.

Flat Rock Forests Trust operates under the Unit Trusts Act 1960.  The High Court was told Flat Rock came into existence in 1989, primarily as an investment opportunity for high net worth immigrants required to establish a business presence in New Zealand as a precondition for New Zealand residency.  Funds were attracted from both intending immigrants and domestic investors.

The trust deed envisaged that Flat Rock would purchase and manage a number of forests.  Borrowing was limited to 35% of total assets.  Investment in other unit trusts was restricted.  About $14 million had been invested in forestry assets.  The court was told Flat Rock is now worthless.  Investors banded together to fund an investigation.

The Unit Trusts Act allows the High Court to appoint inspectors with wide-ranging statutory powers to investigate all aspects of a unit trust's business.  The Act does not specify the circumstances in which appointments should be made.  The Flat Rock application was the first request for inspectors in the four decades over which unit trusts legislation has been in effect.

Justice Durie said there does not have to be evidence of any misconduct before appointing inspectors.  Lack of accounting disclosure supports an appointment.  The cost of any inquiry must be taken into account.  He ruled there were sufficient grounds in this case to order an inquiry.

Investors have received no audited accounts subsequent to March 1996.  In the absence of more detailed information, there are suspicions of management benefiting directly or indirectly from the sale or purchase of assets from Flat Rock.  It is alleged management bought forestry assets in their own right before on-selling to the Trust at up to twice their acquisition price.  Acquisition prices generally are questioned where Trust purchases were made at peak market prices at a time when log prices were falling.

In one example, a forest purchased in July 1994 at a cost of $705,000 was valued at $250,000 just two years later.  Log prices declined about 20% over the same period.  In another case, it is alleged there was a 94 hectare shortfall in forests delivered in one purchase from interests associated with management.  Investors also question why management purchased virgin land and young forests when the Trust prospectus indicated that Flat Rock would invest in mature forests that would provide a regular income to meet debt responsibilities and pay distributions to investors.

The court was told investors were willing to meet the cost of any investigation.  Investors said Mr Bruce McCallum, from McCallum Peterson, a forensic accounting firm, was willing to act as court-appointed inspector.  Lawyers for Flat Rock management objected, saying Mr McCallum had already done work for the investors.  Justice Durie left it to all parties to find an acceptable appointment.  In the absence of a suitable alternative, he said, the fact that Mr McCallum had previously acted for the investors was not fatal to his appointment.

Re Flat Rock Forests Trust - High Court, Palmerston North, M 9/2000, 18 May 2000.

Source: Chartered Accountants Journal September 2000

Several problems with the Inspection procedure were unforeseen.  The inspection took nearly a year.  Unitholders were sent a bill much higher than they were led to expect, though many interim inquiries about costs were made but not answered.  Unbelievably, the Manager and Trustee were allowed to see, and modify, the report before it was published; unitholders were not.  When unitholders asked to see a detailed bill, they were refused and told the work was done for the Court, not the unitholders.  Thus, unitholders apparently had no say over how much time was taken, how much money was spent, nor on what.

Getting an Inspector appointed may be more of a punishment than a blessing in my opinion...

For news articles on the Flat Rock Forests Trust, forestry, the Serious Fraud Office, one immigrant family's experiences, immigration specialists, fraud, juries, logging, and more, pressing the "Up" key below will take you to the Table of Contents for this News section.  Or you may wish to visit the Forestry Trust Table of Contents to read how a unit trust went bust.  Or the Topics Table of Contents which offers a different approach to lots of topics - among them poisonous insects, eating dogs, what's addictive, training vs teaching, tornados, unusual flying machines, humour, wearable computers, IQ tests, health, Y chromosomes, share options, New Jersey's positive side, oddities, ageing, burial alternatives, capital punishment, affairs, poverty, McCarthyism, the most beautiful city in the world, neverending work and more...

Back Home Up Next